Conventional Business Lender, and SBA Guaranteed Loans: Weighing Your Options

When it comes to financing your small business, you have 2 primary loan options: loans guaranteed by the U.S. Small Business Administration’s (SBA) Guaranteed Loans Program or conventional commercial bank loans. We will examine the pros and cons of each loan program to help you decide on the best fit for your business.

SBA Loans

These are commercial loans provided by a bank but are guaranteed by the federal government. To qualify as a small business under current law, a business must demonstrate that it has less than $15 million in tangible net worth and two years’ net income after taxes of less than $5 million.

According to the Maricopa Community College Small Business Financing Handbook:

• 7(a) LOAN PROGRAM: The most popular and flexible loan program, 7(a) loans provide guaranteed financing for a variety of general business purposes. Possible loan maturities are available up to 10 years for working capital and generally up to 25 years for fixed assets.
• 504 LOAN PROGRAM: This program is for those desiring long-term, fixed-rate financing. If you foresee expansion, land purchase, and construction costs, this may be the program for you.  It is backed by the SBA but delivered by Certified Development Companies (CDCs). Maturities of 10 years or 20 years are available and fees total approximately 3% of the debenture and may be financed with the loan.
• MICROLOAN PROGRAM: This program provides small, short-term loans for working capital or the purchase of inventory, supplies, equipment etc. It delivered through specially designated intermediary lenders who each have their own requirements. The maximum term allowed for a microloan is six years and interest rates vary between 8% and 13%.
• CAPLINE PROGRAM: This program helps small businesses meet their short-term and cyclical working-capital needs. SBA CAPLines have a maturity of up to 5 years and is tailored to an individual business’s needs.

Pros:

• Access to capital where traditional commercial loans may not be available.
• Good for start-ups and young businesses without a sustained history of financial performance.
• Good for businesses with cash flow issues because they provide longer loan maturities and lower payments.

Cons:

• Nonprofit organizations, lenders, certain passive businesses, life insurance companies, and private clubs that limit membership are all ineligible.
• SBA loans can require guarantee fees that do not apply to conventional commercial loans.

Conventional Commercial Bank Loans

Your local bank will take the time to understand your company’s objectives, and create a finance package that will get you there. The costs and requirements may differ from bank to bank.

Pros:

• Individual and commercial bank loans typically offer competitive market interest rates and other reasonable repayment terms.
• Conventional loans may cost less and enhance an overall good relationship with your financial institution. Local banks are especially good at catering to the needs of your business

Cons:

• It may be more difficult to obtain longer loan terms.
• Often times, you must have excellent credit scores.

For more information on choosing the loan that is right for you, contact Direct Commercial Funding. We understand the economic situation that our local businesses are facing and help you make a informed decision that could accelerate the growth of your business immediately.